A Scheme Rare as a Dinosaur Alleged by SEC : Securities: The agency says six men cornered 83% of shares in an obscure Santa Ana company.
Southland Communications Inc. isn’t listed in the phone book. Doing business as National Paging Co., it has about 70 employees and an unassuming headquarters in Santa Ana.
After five years of losses and working-capital deficits, Southland is hardly the kind of company that catches the eye of the press or big Wall Street investors.
It was, however, the kind of company that drew a network of short sellers, who this spring speculated that Southland’s stock price would collapse. Instead, the stock soared in a trading frenzy last March, and the short sellers lost their shirts.
The reason, the Securities and Exchange Commission charges in a lawsuit filed Monday, was that company president Ahmad Bayaa, an Atlanta broker-dealer named Shaw Tehrani and four others committed securities fraud by conspiring to manipulate the stock price. The actions were a desperate attempt to keep the firm afloat so the individuals could sell at a huge profit, the SEC said.
The Southland saga, as outlined in the SEC’s 28-page civil complaint filed in U.S. District Court in New York, provides a rare glimpse into the shadowy world of short selling and insider stock manipulation.
What sets the Southland case apart is the extent of the alleged fraud--Bayaa and his cohorts allegedly drove the stock price up by cornering nearly 83% of Southland shares through numerous secret trades, the SEC claims.
“This is about as rare as a Tyrannosaurus Rex walking through Greenwich Village,” said Daniel R. Schnipper, senior counsel with the SEC in New York.
Bayaa declined to comment. The other defendants either refused to comment or could not be reached.
The key figures in the scheme were Bayaa and Tehrani, who met in early 1988 when the chief executive gave a presentation at a brokerage where Tehrani worked as a stockbroker, the suit said. Tehrani later moved to B.C. Financial, a brokerage in Atlanta.
They conspired to manipulate the stock as early as January, 1989, by positioning themselves to secretly control large blocks of shares owned by the four other defendants and 22 friends, family members and brokerage customers, the suit charged.
During the year, Bayaa’s ownership of stock fluctuated from about 35% to 40% of the outstanding shares, but through Tehrani’s accounts the two men secretly controlled more than three-fourths of the total. The SEC requires that shareholders who acquire more than 5% of a company’s shares disclose their holdings and intentions.
Bayaa, 36, is a hard-working Palestinian refugee who moved to the United States virtually penniless in the 1970s and studied electrical engineering at Cal State Long Beach. In 1981 he founded Southland Communications, which provided customers with radio-paging services that allowed them to receive messages away from the office. The company went public in 1987.
By October, 1989, the company had about 48,000 subscribers, mainly in the Los Angeles area, though an account providing Sears Roebuck & Co.’s service technicians with paging services generated 21% of sales.
Hurt by heavy price competition and the cost of investing in paging technology, Southland continually lost money. The company stayed afloat during 1989 with $1.2 million in loans from five unnamed individuals, who were repaid with 146,246 shares of stock at $7 a share.
Bayaa, described by former associates as a quintessential salesman who wore expensive suits, nevertheless maintained an upbeat front. He told people he believed in the company’s future and was in it for the long haul.
In December, Bayaa was characteristically optimistic about the company, former employees said. Despite its large contingent of Palestinians, who as Muslims do not observe Christmas, the company threw a $3,000 Christmas party. At the party, Bayaa said the company’s prospects for recovery were bright.
But for the first quarter ended Jan. 31, the company acknowledged it was in “serious condition” and reported a loss of $324,129 on revenue of $1.9 million. The report said the company was unable to get additional financing and acknowledged auditors’ concerns that the company might not continue as a “going concern.”
During the quarter, Bayaa and Tehrani realized that the sagging performance of the company could prompt a stock selloff that would lower prices sharply. They also feared short sellers had taken positions in the firm.
In a short sale, an investor speculates that a company’s stock will fall in value over a given time. The short seller borrows stock and then sells it in the open market. The seller must buy back the same number of shares later and return them to the lender. If the stock price drops as expected, the short seller makes a profit from the difference between the purchase prices. But if the price rises, more money is needed to “cover” the same number of shares, and the short seller loses money.
Short sellers say they contribute to market efficiency, but stockbrokers often deride them as vultures who sometimes generate false rumors about a company.
In any case, the short sellers’ interests ran counter to the management of Southland, and a classic confrontation set in.
“Someone is trying to destroy the company,” Bayaa reportedly told employees when the short sellers began targeting the company this year.
Bayaa sought to get extricate the company by positioning Southland as a takeover candidate. That plan itself required the acquisition of another paging firm, A+ Beepers of California in Torrance, to give Southland almost 80,000 subscribers.
That would be near the 100,000 mark that Tehrani believed Southland needed to become an attractive takeover candidate, the SEC said. Since Southland’s subscriber growth had always been healthy, the mark was “well within sight,” the SEC said.
To finance the acquisition, Bayaa tried to secure $5 million in a private placement of stock with unidentified investors in the Middle East. For both ventures--the private placement and the acquisition--it was crucial that Southland’s stock price be stable or rising, the SEC said.
One snag arose in October when Pacific Bell petitioned the state Public Utilities Commission to block the takeover, saying that A+ Beepers had worked as its agent and therefore its customers belonged to Pacific Bell. Pacific Bell and A+ Beepers are negotiating to settle the dispute, said Pacific Bell spokeswoman Linda Bonniksen.
But the real trouble for Southland began on March 3.
That day, Tehrani angrily heaved a telephone through his office window when he learned of a written recommendation circulated on Wall Street. It urged investors to sell the company’s stock short, a sure sign that the drop in price was imminent, the SEC said.
The unsigned report was allegedly generated by John Pehrson, owner of K. A. Knapp & Co., a firm with a checkered history that also happened to take Southland public, sources said. Pehrson declined to comment.
After the report, the short sellers swarmed over Southland. The defendants countered aggressively.
Bayaa and Tehrani obtained their “ultimate weapon” in their battle with the short sellers from BHC Securities in Philadelphia, which handled trades for a firm with many Tehrani-controlled accounts. BHC agreed to Tehrani’s request not to loan out any more shares to the short sellers, the SEC said.
By March 14, Tehrani cornered the market in Southland’s stock, the SEC alleges, and the share price skyrocketed 49% in a day.
Trading volume in Southland stock rose to a frenzy level of 3.3 million shares in March from 103,500 in February. At the same time, the short sellers were dramatically increasing their investments.
The suit alleges that Bayaa and Tehrani knew that substantial short sales would cause the price of the company’s stock to fall, cut the value of their holdings and disrupt deals to acquire another company and place stock with private investors.
To counteract the short sellers, Bayaa and Tehrani allegedly plotted to “squeeze” them by artificially withholding shares from the market, thereby manipulating the price upward, the SEC said, and forcing the short sellers to take losses.
The SEC claims the pair orchestrated the manipulation in a number of ways: Through accounts they controlled, they withdrew from the market as much of the freely-trading stock as possible and created the illusion of nationwide buying interest; they engaged in prearranged transactions, and Bayaa fabricated optimistic reports about Southland’s future, such as a statement in November that the company rejected a $17-a-share takeover bid in hopes of receiving a $25 bid.
The SEC says the broker-dealers that Bayaa and Tehrani allegedly used were scattered throughout the country, with each firm trading only a small percentage of the stock the two men controlled. Bayaa or Tehrani directed brokers to open accounts in the names of one of their associates.
Tehrani directly controlled 24 accounts associated with Bayaa or himself at B.C. Financial. Bayaa reportedly set up four bogus accounts with Stifel, Nicolaus & Co. in St. Louis. The accounts were later spread to other firms including Baird Patrick & Co in New York; Legg Mason Wood Walker, Inc. in Baltimore; Paine Webber Group Inc. in New York; Blunt Ellis & Loewi Inc. in Milwaukee; Prudential Bache Securities Inc. in New York; Suplee Reed & Co., a defunct firm in Media, Pa., and Newhard, Cook Advest Inc. in St. Louis.
While SEC officials declined to elaborate on their investigation, the lawsuit suggests the agency has evidence that Bayaa told a public relations agent he was planning a “short squeeze,” and phoned brokers giving them instructions on how to manipulate the stock prices.
If there were such instructions, they apparently worked. Southland’s bid price soared from $8.75 a share on March 13 to $16.75 a share on April 3, a 91% increase. The final bid price represents 87 times the company’s per-share book value for the first quarter ended Jan. 31 and 6.5 times annual sales.
The price increase was triggered by the squeeze on the short sellers, who had to cover their positions by buying back more expensive shares.
On April 4, the SEC halted trading in Southland and began its investigation. One source said Bayaa cooperated with the SEC, perhaps telling more than he should have without his lawyer.
In its suit, the SEC charged that Bayaa and Tehrani held direct or indirect control over 83% of the company’s 2.3 million shares by early April, far more than the 919,804 shares Bayaa reported he controlled at the end of October. The agency said the defendants failed to disclose their true holdings, as required by law.
The suit charges that the defendants ran up an unpaid bill of $11.6 million for thousands of shares bought partially on credit. Of six securities firms owed money by customers affiliated with Tehrani and Bayaa, the SEC says BHC is owed the most, at $7.5 million, and it has been unable to collect from Tehrani.
The SEC is seeking to recover profits from the defendants’ alleged fraudulent activities, as well as other relief. The SEC did not specify damages.
Throughout, Bayaa and his family are keeping stiff upper lips. His wife, Jill Bayaa, is standing by her man. “He is an honest, sincere man who was only trying to save his company,” she said.
